The Tax Cuts and Jobs Act (The Act), has brought with it many changes that impact business owners. One of the most significant changes created by The Act is the new 199A qualified business income (QBI) deduction. Qualified business income includes domestic income from a trade or business and most real estate rental activities. Employee wages, capital gain, interest dividend income, and guaranteed payments to partners are excluded. The idea behind creating the QBI deduction was to reduce the taxable income of qualifying companies.
Under the new Code Section 199A, there is a 20% deduction for QBI from a pass-through entity (Partnerships & S-Corps). The deduction also applies to sole proprietorships, trusts, estates, qualified cooperatives and real estate investment trusts (REITs).The QBI deduction can be applied for the first time in 2018, and is currently available to taxpayers whose 2018 taxable income falls below $315,000 for joint returns and $157,500 for other taxpayers The QBI deduction is also available to others as long as they are not involved in a specified service trade or business (“SSTB”). According to the IRS, “the deduction is generally equal to the lesser of 20% of the taxpayer’s QBI plus 20% of the taxpayer’s qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income, or 20% of taxable income minus net capital gains.”
On August 8, 2018, the IRS issued proposed regulations to Section 199A.
Proposed Changes in 199A Regulations
The complete list of proposed regulations includes sections detailing operational rules, special rules designed to prevent abuse, sections that address qualifying definitions, guidelines on how to determine wages and apply the deduction, and rules for aggregation, which will allow separate trades or businesses to be grouped when applying the Sec. 199A rules.
The IRS is requesting comments on all of the proposed rules, which must be received within 45 days of the date they are published in the Federal Register.
Along with the proposed new regulations, the IRS also issued Notice 2018-64, which provides methods for calculating the W-2 wage amount used to determine the limitations on this deduction, as well as a FAQ page.
The IRS has indicated that taxpayers may rely on the rules in these proposed regulations until final regulations are published in the Federal Register.
How MBAF Can Help
Overall there are “winners and losers” from these new regulations. Until now all we could do was guess how the IRS would interpret these new concepts. With these new regulations we have a much more concrete basis to plan and address our client’s needs. Now that the IRS has issued proposed rules regarding the QBI deduction, you can count on our tax experts to review and understand the guidelines provided by the Service, and apply them to maximum advantage for your particular operation.
Compliance with and understanding the new tax codes and potential tax savings created by the passage of the Tax Cuts and Jobs Act can be complex. If you would like to benefit from our expertise in these areas, or if you have further questions on this Advisory, do not hesitate to contact our Tax and Accounting Specialists, or call us at 1-800-239-1474.